The quote is much more sensible under that interpretation.
However, a motif of Rand's is to moralize about capitalism and individuality. One of the themes, of which I think the current quote is an example, is that people have been trained to feel bad about their selfish impulses. Rand viewed the laws of her time as an outgrowth of the "evil" of altruism. As such, their "power" comes not just from being enforced, but from being held out as altruistic norms and carrying the moral weight that goes beyond their mere enforcement. As ludicrous as that sounds, I think I disagree with you and find it even more ludicrous that the antagonist actually wants to incarcerate people. To what end?
Also, the antagonist explicitly disavows that he want the laws obeyed, and also that they are even meaningful. He's trying to get people to live in fear.
The point is not to incarcerate people, but rather to gain leverage by being able to credibly threaten incarceration. This is standard operating procedure for prosecutors and police when dealing with confidential informants in drug cases. It's not such a stretch to think it may also happen in other cases.